OIG audits, inspections, and investigations over the last 6 months achieved $44,150,901 in potential dollar
results, 22 indictments, and 34 convictions. The dollar results consist of $21,251,476 in potential recoveries,
including judicially-awarded fines and restitution; $16,545,466 in management avoidances; $1,035,911 in disallowed
costs agreed to by SBA's management; and $5,318,048 in management commitments to use funds more efficiently.
The OIG alone could not have achieved the accomplishments set forth in this report to the Congress. The results
for this reporting period reflect the cooperation and support of other Federal audit, inspection, and investigative
organizations such as the Federal Bureau of Investigation (FBI); U.S. Secret Service; U.S. Marshals Service; Internal
Revenue Service (IRS); Office of the Comptroller of the Currency; Resolution Trust Corporation; Environmental Protection
Agency's (EPA) Office of Criminal Enforcement; other Federal OIGs; Department of Justice (DOJ) prosecutors; and,
most importantly, the actions of SBA program managers and employees. Indeed, much of our success is due to referrals
made by conscientious SBA employees.
OIG Mission for FY 1997
The OIG's mission for 1997 is delineated in its recently completed Strategic Plan for Fiscal Years 1997-2002.
The first two goals of the strategic plan and their associated objectives provide a roadmap for the OIG's program-related
mission. The OIG's first goal is to improve the economy, efficiency, and effectiveness of SBA programs through
the Agency's adoption of recommendations resulting from the OIG's oversight activities. Achievement of this goal
will be accomplished by meeting the following objectives:
1. Find opportunities for the reduction of operating costs (salaries and expenses) associated with and supporting
activities of SBA's programs.
2. Identify means for reducing the subsidy cost of SBA programs.
3. Ensure that SBA programs are meeting mandated public policy goals, high performance standards, and the needs
of targeted participants.
4. Improve the accuracy of SBA accounting and management information.
5. Assure Agency implementation of accepted OIG recommendations and, to the extent that OIG resources allow, provide
assistance to program managers in implementing recommendations.
6. Reduce the opportunity for loan packager fraud through cooperation with Agency officials in the registration
of loan packagers and the pursuit of packager investigations.
7. Review proposed legislation, regulations, standard operating procedures, and other SBA issuances to improve
Agency programs and to eliminate the potential for mismanagement.
8. Identify program vulnerabilities or systems weaknesses found during investigations and alert appropriate SBA
program managers.
The OIG's second goal is to reduce fraud and abuse in Agency programs and foster integrity in SBA's personnel and
the Agency's resource partners. This goal will be accomplished by meeting the following objectives:
1. Assist the SBA in its efforts to deter fraud and abuse by auditing a sample of defaulted loans and Section 8(a)
program participants suspected of abusing the contracting assistance program.
2. Assist the SBA in deterring waste, fraud, and abuse by responding to complaints concerning such activities with
OIG staff assistance and consultation.
3. Recommend actions to reduce any program vulnerabilities uncovered as a result of OIG oversight activities.
4. Conduct investigations into allegations of fraud in SBA programs according to the perceived level of risk to
the Agency and the potential for program impact or increased deterrence.
5. Pursue asset forfeiture proceedings in all applicable cases.
6. Participate in development of SBA's fraud and corruption awareness training programs and emphasize cooperation
of Section 7(a) lenders in combating fraud through fraud awareness briefings and outreach contacts with lenders.
7. Refer an average of 75 cases annually to the Department of Justice for Affirmative Civil Enforcement (ACE) and
increase the value of civil fines imposed.
8. Preclude persons of poor character from participating in SBA programs or employment through the use of name
check requests, fingerprint requests, pre-employment screening, and required background investigations.
The OIG's last two goals involve communicating OIG findings, recommendations, and results to all SBA stakeholders;
and ensuring the economical, efficient, and effective operation of the OIG. The extent to which the OIG will be
able to achieve its mission depends, in part, on the sufficiency of resources available to fund its operations.
Highlights of the Past Six Months
Efforts to Improve SBA Program Management
Best Practices of Section 7(a) Lenders. The OIG issued an inspection report focused on the credit management procedures
identified by nine successful lenders in case studies as the most effective means for controlling risk. Although
not all the procedures may be applicable to every Section 7(a) lender, the OIG believes that SBA's encouragement
of such best practices could improve the effectiveness of its lending partners while keeping loan losses to a minimum.
Among other things, the inspection team found that the successful lenders in the sample rely more on evaluating
an individual borrower's situation than on automated screening methods such as credit scoring; generally avoid
using external loan packagers; require the borrower to pledge both personal and business assets as collateral,
despite the availability of the SBA guarantee; centralize final lending decisions to ensure consistency and control;
assign risk ratings to new loans and periodically reassess them through the life of the loans; proactively watch
for warning signs of future loan repayment problems; and identify past due loans early and initiate vigorous collection
efforts. Although the report contained no formal recommendations, the OIG suggested that the Agency incorporate
the best practices identified into its guidance for new lenders, its monitoring criteria for existing lenders,
and its selection criteria for the Preferred Lenders Program. The report was distributed to all Preferred Lenders,
Certified Lenders, and SBA field offices.
Annual Audit of SBA's Financial Statements Yields SBA's First Unqualified Opinion. For the first time in 6 years
of audits conducted in response to the Chief Financial Officers Act, SBA's financial statements for FY 1996 received
an unqualified opinion. The independent auditors found that SBA had made progress on the two problems that caused
the previous opinions to be qualified.
Audit of Early Defaulting Loans Finds Indications of Fraud and Abuse. An audit of 17 guaranteed loans that defaulted
within 24 months of origination showed that 9 of the loans had indications of fraud and abuse that may have contributed
to the early defaults. SBA recorded a loss of $6.2 million on the 17 loans after paying on the guarantees and
liquidating the loan assets. Only one of the nine loans was referred to a law enforcement agency for investigation;
the remaining eight loans were not because neither SBA nor the lenders detected any indications of fraud and abuse.
The OIG's Auditing Division did, however, refer these eight loans to the Investigations Division. (See page
8.)
Activities to Enhance Fraud Detection and Deterrence
Results of False Tax Return Cases Increase. Over the last 6 years, the OIG has received 333 allegations that false
tax returns were submitted in support of SBA business or disaster loan applications. These fraud referrals now
involve loan applications submitted to 48 SBA district offices, totaling $120 million and involving 1,146 individual
subjects. To date, 91 individuals have been indicted on criminal charges: 84 have been adjudicated guilty, 3 indictments
have been dismissed, and 4 others have not gone to trial.
Affirmative Civil Enforcement Program. The OIG continues to expand the scope of its efforts to make optimal use
of the Department of Justice's Affirmative Civil Enforcement (ACE) program. This U.S. Attorney program targets
cases which might not be prosecuted criminally because of the minimal dollar amounts involved, absence of financial
loss to the Government, or because the facts of the case might not support a criminal prosecution. Heretofore,
our success with the ACE program was focused in only 13 states; however, over the course of this reporting period,
the OIG realized its first ACE results in Connecticut, Louisiana, and Puerto Rico.
During the approximately 45 months the OIG has been involved with the ACE program, we have had a total of 76 successful
cases, resulting in $2,742,010 in civil penalties and $3,735,900 in recoveries by SBA. Individual ACE outcomes
are reported in the program area chapters, as appropriate.
Millions Recovered from Disaster Fraud Scheme. A joint OIG and U.S. Secret Service investigation targeted two
southern California brothers who had acted as disaster loan packagers. At the end of the reporting period, more
than $11 million had been realized through court-ordered restitutions and fines, loans declined, or loans canceled.
The investigation had also resulted in guilty pleas from 27 of the 28 persons charged with crimes in the case.
In addition to the brother who has pled guilty to the largest fraud scheme ever perpetrated against SBA's disaster
assistance program, 26 others also pled guilty to false statements made in their applications for economic injury
loans in the wake of the 1992 civil unrest in Los Angeles. Many of the applicants applied in the names of businesses
that did not exist; much of the fraud was facilitated by the submission of copies of fictitious income tax returns
or the use of altered copies of actual tax returns. The case was opened as a result of a tip from a concerned
citizen and a referral from the Disaster Assistance Area 4 Office.
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* Updated: 2/4/98